Texas Non-Compete Agreements – the non-compete bloghttps://thenoncompeteblog.com
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1 http://wordpress.com/https://secure.gravatar.com/blavatar/8f4ab113789a18c1b1b141dd9d91af82?s=96&d=https%3A%2F%2Fs0.wp.com%2Fi%2Fbuttonw-com.pngTexas Non-Compete Agreements – the non-compete bloghttps://thenoncompeteblog.com
Texas Court Refuses to Apply Texas Choice of Law in Non-Compete Fight Involving Texas Bankhttps://thenoncompeteblog.com/2014/10/17/texas-court-refuses-to-apply-texas-choice-of-law-in-non-compete-fight-involving-texas-bank/
https://thenoncompeteblog.com/2014/10/17/texas-court-refuses-to-apply-texas-choice-of-law-in-non-compete-fight-involving-texas-bank/#respondFri, 17 Oct 2014 19:05:50 +0000http://thenoncompeteblog.com/?p=2228Continue reading →]]>A recurrent theme in non-compete litigation is the overriding importance of choice-of-law. The latest example comes to us from the United States District Court for the Southern District of Texas and pits a Texas choice-of-law provision against Oklahoma public policy. Let’s take a look:

Sometime in early 2013, Tulsa, Oklahoma based F&M Bank began talks with Prosperity Bank about a possible merger. Those talks progressed into the summer of 2013 and the parties ultimately reached a deal. In August 2013, as part of the merger, Prosperity offered employment agreements to 35, mostly higher level F&M employees. These employees included the plaintiffs in the instant case: Chris Cardoni, Wesley Webb, all of whom worked in Tulsa, Oklahoma. In late August, several of these employees – including the plaintiffs – signed employment agreements (“the Agreements”) with Prosperity. The Agreements were similar in all respects except for compensation. All of the Agreements included non-compete and non-disclosure provisions in exchange for a three-year employment term, access to confidential information, restricted stock and – in one instance – a signing bonus. The merger between F&M and Prosperity took effect on April 1, 2014.

As often happens in mergers, the employees who formerly worked for F&M were unhappy in their new jobs at Prosperity. The employees felt they had been misled about the nature of Prosperity’s business, the nature of their opportunity with the company, corporate policies and employee benefits. Further, the employees maintained that they were misled about their new employment agreements. According to the employees, the former president of F&M Bank and now current president of Prosperity’s Tulsa division told the employees that they would lose their jobs and bonuses if they did not sign the Agreements. Additionally, the employees claimed there was other inequitable conduct related to the Agreements: Some employees allegedly were told not to worry about the Agreements because they would be unenforceable under Oklahoma law. In light of this representation, one employee specifically asked to have a choice-of-law clause changed from Texas law to Oklahoma law. He was told that the Agreement was non-negotiable. But ultimately, the employees signed the Agreements.

By the summer of 2014, things had reached a breaking point. On June 2, 2014, while still employed by Prosperity, the employees filed a lawsuit against Prosperity and certain F&M officers in Oklahoma state court. The Oklahoma state court action sought a declaration that the Agreements were void and unenforceable and also included claims for tortious interference and fraud. Two days later, Prosperity filed a state court action in Texas seeking a declaration that the Agreements were enforceable and asserting claims for breach of contract against the employees. Both cases subsequently were removed to federal court. Once in federal court, Prosperity moved to transfer the Oklahoma case to the Southern District of Texas pursuant to a forum selection clause contained in the Agreements. The Northern District of Oklahoma granted Prosperity’s request and the Oklahoma case was transferred to Texas. Both lawsuits were then consolidated in the Southern District of Texas as of August 5, 2014.

Strangely, all the while, the employees were still working for Prosperity in Tulsa. But ultimately, the employees gave notice of their intent to terminate the Agreements and resign from Prosperity. The employment Agreements were terminated effective August 28, 2014. Four days later, the employees began work at CrossFirst Bank, also in Tulsa, Oklahoma. Meanwhile, the litigation continued in Texas.

Now here is where things get interesting: The parties filed dueling motions on choice of law. Although the Agreements contained a Texas choice of law provision, the employees argued that Oklahoma law should apply. Prosperity et al argued that the Court should honor the contractual choice of law provision and apply Texas law. As practitioners in this space know, Oklahoma non-compete law is much more pro-employee than Texas non-compete law.

I have seen many cases where courts give short shrift to the choice-of-law issue. Based on the facts of this dispute, I would have expected the Court to apply Texas law. After all, Prosperity – the defendant and counter-plaintiff – is based in Houston. And the Agreements say Texas law applies. I have seen a number of cases where courts upheld contractual choice-of-law provisions on similar facts. But that’s not what happened here.

Remember Your Conflicts of Law

A federal court sitting in diversity applies the choice-of-law rules of the forum state. In this instance, that would be Texas. [Footnote 1]. Texas determines enforceability of contractual choice-of-law provisions under the Restatement (Second) Conflicts of Laws § 187. Section 187 provides, in relevant part that the law chosen by the parties will govern unless either:

a. the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or

b. application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

The upshot of all this: 187(2)(a) does not apply because Texas – where prosperity is based – has a substantial relationship to the parties and the transaction. This means choice of law is governed by 187(2)(b). Under that section, the Parties’ choice of Texas law applies unless (1) another state has a more significant relationship to the transaction than Texas (2) that state has a materially greater interest than Texas and (3) that state’s fundamental public policy would be contravened by application of the chosen law.
In evaluating the first prong of the test, the Court weighs a number of factors to determine which state has a more significant interest. Those factors include both specific contacts (e.g. the domicile of the parties, place of incorporation, place of contracting, etc.) and more abstract policy considerations like the needs of interstate systems, the polices of the interested states, and the parties’ expectations. In the instant case, all of the employees were Oklahoma residents, negotiated their contracts in Oklahoma and worked in Oklahoma. Now, Prosperity was seeking to prevent them from working in Oklahoma. On the flip side, Prosperity was a Texas company, the place of contract was Texas and the Agreements indicated Texas law would apply (which goes to the parties’ expectations). Ultimately, the Court concluded that Oklahoma had a greater interest in the transaction. In reaching this conclusion, the Court emphasized that the employees worked only in Oklahoma. The Court noted that this factor alone can be dispositive in choice of law analysis. [Footnote 2]. So the first prong of the test is satisfied.

Next, the Court considered whether Oklahoma had a materially greater interest than Texas in determining the enforceability of the restrictive covenants at issue. Texas has an interest in enforcing contracts entered by Texas citizens and Texas companies. On the flip side, Oklahoma has an interest in determining whether or not a non-compete agreement can bar Oklahoma residents from working for an Oklahoma bank in Oklahoma. While noting that Texas did have an important interest at stake, the Court concluded that Oklahoma’s interest was greater because the matter ultimately involved restrictions on the conduct of Oklahoma citizens within the borders of Oklahoma.

Finally, the Court addressed the public policy factor. The ultimate question here is whether applying Texas non-compete law contravenes a substantial or fundamental Oklahoma public policy. Many states, including Oklahoma, consider restraints of trade and enforcement of non-compete agreements matters of fundamental state policy. And as it turns out, from a comparative law perspective, Oklahoma takes a far more restrictive view of non-compete agreements than Texas. Under Oklahoma law, a non-compete agreement that generally prohibits an employee from engaging in his profession is unenforceable. Further, Oklahoma law allows for relatively limited reformation of overbroad non-compete agreements, whereas Texas law requires judicial modification to make such agreements reasonable. The bottom line: Application of Texas law to the instant dispute would contravene fundamental Oklahoma public policy. As a result, Oklahoma law controls the non-compete and non-solicitation claims, while Texas law applies to the non-disclosure claims (because non-disclosure agreements to not run afoul of Oklahoma policy). The employees also brought a fraud claim against Prosperity and various corporate officers. After conducting a choice of law analysis, the Court determined that Oklahoma law would apply to this claim as well.

After resolving the choice-of-law issue, the Court finally reached the merits of the dispute: The enforceability of the Agreements at issue and cross-motions for summary judgment. Under Oklahoma law, non-compete agreements are void unless they fall into certain narrow statutory exceptions. The relevant exceptions for this case relate to (1) the sale of goodwill in a business and (2) certain narrow post-employment restrictions. As to (1), Prosperity argued that because the employees received stock in the company, the non-compete agreements were reasonable and enforceable as restraints attendant to the sale of goodwill in a business. The Court found that the employees’ stock interest was not appreciable enough to justify application of the goodwill exception. This left only the narrow post-employment exception. Under Oklahoma law,

A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.

Okla. Stat. Ann. tit. 15, § 219A (West). The Agreements in instant case went far beyond this. In terms of geographic scope, the Agreements restricted competition within a 50-mile radius of any F&M or Prosperity Bank. This effectively covers all of Oklahoma and Texas. In short, the employees were prohibited from working in banking, period, anywhere in Oklahoma or Texas for three years. In fact, the employees were also prohibited from working for any Prosperity competitor even if they did so in an entirely different job capacity. The Agreement also contained aggressive restrictions barring the employees from having any contact with Prosperity customers and prospective customers. And finally, the Agreements prohibited the employees from having any contact with Prosperity’s current employees.

The bottom line: The restrictive covenants at issue go far beyond what Oklahoma law allows. The Court entered summary judgment for the employees holding that the non-compete and non-solicitation provisions in the Agreements were unenforceable. The other claims – Prosperity’s claims for breach of the non-disclosure provision and the employees’ claims for fraud – will move forward.

The Takeaways

(1) Choice of Law Matters: Non-compete agreements are governed by state law. There is tremendous variation in non-compete law from one state to the next. This case gives us a great example: The non-compete and non-solicitation provisions would have been enforceable under Texas law. They are completely unenforceable under Oklahoma law. If you throw different state laws into the mix, the results can change dramatically.

(2) Consider Fighting the Choice of Law Fight: In this case, you had a Texas corporation seeking to enforce a Texas choice-of-law provision in a Texas court. There are numerous cases where courts have upheld contractual choice of law provisions on similar facts. Here’s an example: a case from Missouri that I wrote about last year. I could easily see a court saying that Texas has an interest in protecting its corporate citizen Prosperity, protecting Prosperity’s reasonable expectations and enforcing its contracts—and that this interest trumps. Apparently, Prosperity assumed Texas law would apply because it also moved for a preliminary injunction and briefed the issues under Texas law. Although I would have expected the Court to apply Texas law, I feel that the Court’s analysis – and ultimate application of Oklahoma law – is the correct outcome. Bottom line: It’s worthwhile to explore the choice of law argument and do the analysis. If there’s even a small chance of winning the choice of law fight, then take your shot.

[1] I note, however, that this general principle does have an exception: Where a case is transferred from one federal court to another under 28 U.S.C. 1404, the receiving or transferee court is required to follow the choice-of-law rules of the transferor court. Here, the employees initiated their action in Oklahoma and that action was transferred to the Southern District of Texas under 1404. The Texas court consolidated two actions: the case originally filed in Oklahoma and the case originally filed in Texas. To get technical, Oklahoma choice-of-law principles should have been applied to the part of the action that was transferred in from Oklahoma. But the end result would have been exactly the same: Oklahoma applies the doctrine of lex loci contractus when faced with a contract claim and a choice of law dispute. The law of the state where the contract is made controls. A contract is made wherever the last action necessary for the formation of the contract takes place. In the instant case, the employees signed the contracts in Oklahoma and returned them to Prosperity who then executed them in Texas. As such, the place of contracting was Texas. So under Oklahoma choice of law rules, Texas law presumptively would apply. BUT, in this specific instance, an Oklahoma court would have gone a step further and said that application of Texas law violated Oklahoma public policy regarding restraints of trade. So, in the end, under Oklahoma choice of law rules, Oklahoma law would have applied.

[2] This is an incredibly important point to note: Where there is an agreement related to the performance of personal services in a particular state, that factor alone can be dispositive in establishing that the law of that state controls. The seminal Texas case – cited by the Court – is DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679 (Tex. 1990), which collects cases from a number of other jurisdictions on this point.

Jonathan Pollard is a trial lawyer and litigator based on Fort Lauderdale, Florida. He focuses his practice on defending non-compete and trade secret claims. Jonathan routinely represents doctors, corporate executives and other high level employees who are switching companies, or, who have started their own ventures. Beyond litigation, Jonathan advises employees, companies and business owners regarding restrictive covenant issues in connection with employment contracts, separation agreements, hiring decisions, the purchase or sale of business interests and the execution of commercial leases. Jonathan has been interviewed about non-compete issues by reporters from INC Magazine, the BBC, the National Federation of Independent Business and The Tampa Bay Times. In addition to his background in non-compete and trade secrets work, Jonathan has broad experience as a competition lawyer, generally, and has litigated numerous cases under both the Sherman and Lanham Acts. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380. For more information, visit http://www.pollardllc.com.

A recent case out of the Northern District of Texas and the Fifth Circuit Court of Appeals touches upon the intersection of non-compete agreements and ERISA plans.

From 1998 until his resignation in 2010, George Wall worked for Alcon Laboratories, a major pharmaceutical company. In the years leading up to Wall’s resignation, Alcon was in a state of Flux. In 2008, pharmaceutical giant Novartis began its takeover of the company. In connection with the Novartis takeover, Wall’s responsibilities were substantially altered. He was shuffled around between different supervisors and reassigned between a few different divisions of the research and development department. In 2009, during a performance review, Wall expressed concerns that his role in the company was being diminished. Although Wall gave himself high performance ratings in self assessments, his supervisors found that he only “partially met expectations.” As a result, Wall received a smaller raise and bonus than he had expected. On November 2, 2010, still unhappy with the direction things were going, Wall arranged for a meeting with Alcon’s HR director, Vickie Stamp, to discuss the situation. He asked about an appeal of his 2009 performance review. A week later, Wall again met with Stamp, this time to discuss the possibility of his retiring. Apparently, Wall was unsatisfied with the outcome of that meeting. That same day, Wall was offered a job as Vice President of Product Development with Otonomy, Inc., another biopharma company. Roughly a week later, Wall accepted the offer. Interestingly, his contract with Otonomy provided that the company would pay up to $50,000 in legal fees if Wall became involved in a dispute with Alcon over severance or retirement benefits.

On November 23, 2010, Wall emailed one of his supervisors and informed them of his intention to retire as of December 31st. His last day at work would be December 17th, after which he would take two weeks of paid vacation time. On December 1st, Wall wrote to Alcon’s attorney explaining the reasons for his retirement and requesting certain retirement benefits.

Since 2004, Wall had been a participant in the Alcon Supplemental Executive Retirement Plan (“the Plan”), an employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”). As a condition of participating in the Plan and receiving Plan benefits, employees were bound by certain restrictions. Yep, you guessed it: Employees who received plan benefits agreed, among other things, not to disclose Alcon’s confidential information and not to compete against Alcon for five years following termination of employment. Alcon, like many other companies, had a committee that administered the benefits and made decisions regarding those benefits (“the Plan Committee”).

After receiving Wall’s December 1st request for Plan benefits, Alcon’s in-house counsel emailed Wall and asked him to provide additional information regarding his new place of employment and the nature of his position there. Wall refused to provide any further detail. In fact, on December 22nd, Wall sent an email to the Plan Committee and indicated that the Company’s request for more specific details regarding his new job was unreasonable and violated his confidentiality obligations to his new employer. Alcon continued to follow-up with Wall requesting information on his new employment. Eventually, on January 21, 2011, Wall’s attorney wrote to Alcon indicating that he had accepted a position with Otonomy but that Otonomy did not compete with Alcon because it was a start-up company.

Although Otonomy may have been a start-up company, it was aggressively pursuing the same market space as Alcon. Otonomy was working on developing competing products, such as medications for ear infections. And landing Wall clearly was viewed in competitive terms. When Wall began working for Otonomy, the company touted his hiring in a press release that detailed his experience at Alcon. In light of these considerations, the Alcon Plan Committee denied Wall’s earlier request for Plan benefits on the grounds that he was working for a competitor in violation of Plan guidelines. As a result, he was not entitled to benefits. The Committee gave Wall 60 days to appeal that decision. Wall appealed. Ultimately, on September 27, 2011, Alcon affirmed its denial of Plan benefits on the grounds that Alcon and Otonomy were both competing in the market for treatments of certain ear conditions, and, as a result, Wall had breached the terms of the Plan.

Eventually, Wall filed suit against Alcon. His claims went beyond Plan benefits: Wall also sued for breach of contract based on a dispute over vesting of certain restricted Alcon stock and for age discrimination and retaliation. The district court granted summary judgment for Alcon on all counts and the Fifth Circuit affirmed the decision on all points. The entire decision out of the Fifth Circuit is interesting and worth a read, but for my purposes, let’s focus on the non-compete aspect:

The first thing to note is that there is no affirmative claim for violation of any non-compete agreement. This isn’t a standard non-compete case. This is not a non-compete agreement tied to employment, where continued employment or salary is the consideration for the restrictive covenant. Instead, we have a non-compete provision contained in an ERISA plan and tied to certain retirement benefits.

Immediately, this tells us that we are outside of the traditional non-compete / restrictive covenant / restraint of trade framework. Alcon is not seeking enforcement of a non-compete agreement so the court does not delve into whether or not the non-compete provision is supported by a legitimate business interest.

But that’s not all: Even though we are dealing with the terms of a benefits plan and various agreements between the Company and plan participants, we are not in the breach of contract framework.

Instead, all of this has to be run through the ERISA framework. Both in the district court and on appeal, Wall argued about the exact terms of the non-compete provision, how it was written in the present tense (i.e. a company that “competes”), and how he wasn’t actually competing against Alcon because his new company only had products that were in the developmental stages. Wall advanced a number of other relatively weak arguments as to why he was not competing against Alcon, in violation of the provision contained in Plan guidelines. Ultimately, the Fifth Circuit rejected all of these arguments as absurd— both Alcon and Otonomy were involved in developing treatments for ear infections; they were clearly competitors.

But then the Court put all of this aside and made clear that this was not a matter of strict contract interpretation or ascertaining the true meaning of the agreement: Instead, this was about ERISA. And under ERISA, the only question is this: Was Alcon’s decision to deny Wall benefits arbitrary and capricious? On these facts, the answer is certainly not.

And because I’m such a nerd, I’ll take it a bit further: Isn’t there a more interesting question here about the interplay between the enforceability of the non-compete provision, the contract and ERISA? Suppose we have an ERISA plan, as we do here, and the plan contains broad non-compete provisions. Suppose those provisions are likely unenforceable in some instance. For example, the non-compete restrictions apply uniformly to everyone who participates in the plan. Suppose some employees who are plan participants never had access to legitimately confidential information, never had contact with company clients, etc. Suppose that, in some instances, the non-compete provision was not supported by a legitimate business interest and is, therefore, unenforceable. Or, suppose the non-compete was dramatically overbroad in terms of temporal and geographic scope. Maybe we’re in a state that doesn’t blue pencil.

So let’s say the Plan requires participants to abide by this overbroad non-compete agreement that, in some instances, is unnecessary and unenforceable. Suppose an employee, Jim, leaves Company A, moves across the country, and takes a job with Company B, a company that competes with Company A. But Jim never had access to Company A’s confidential information or customer relationships. And assume further that Jim is working in a division of Company B that doesn’t compete with Company A. And on these facts, Company A’s benefits committee denies Jim’s request for retirement benefits.

If the restrictive covenant contained in the benefits plan is legally unenforceable, what happens?

Do we ever get out of the ballpark of ERISA plan administrator discretion and back into the ballpark of the law of restrictive covenants?

What is the limit of that discretion in situations involving covenants not to compete? Does the limit of plan administrator discretion hinge, in any way, on the underlying law of restrictive covenants?

For me, these are all very interesting questions to consider. The case is Wall v. Alcon Labs. Inc., 13-10117, 2014 WL 97287 (5th Cir. Jan. 10, 2014). The Supreme Court denied cert on June 30, 2014.

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on competition, particularly cases involving non-compete, trade secret and antitrust disputes and represents clients in Florida and throughout the country. He is licensed in all Florida federal and state courts and routinely represents clients in Fort Lauderdale, Miami, West Palm Beach, Boca Raton, Fort Myers, Tampa, Orlando, Jacksonville, and Sarasota. His office can be reached at 954-332-2380.

]]>https://thenoncompeteblog.com/2014/02/03/non-compete-provisions-in-erisa-plans-a-recent-5th-circuit-case/feed/20.000000 0.0000000.0000000.000000thenoncompeteblogRestaurant Industry Giant Landry’s Sues Former Employee & Rival Restaurant Companyhttps://thenoncompeteblog.com/2013/04/02/restaurant-industry-giant-landrys-sues-former-employee-rival-restaurant-company/
https://thenoncompeteblog.com/2013/04/02/restaurant-industry-giant-landrys-sues-former-employee-rival-restaurant-company/#respondTue, 02 Apr 2013 18:05:32 +0000http://thenoncompeteblog.com/?p=313Continue reading →]]>Landry’s Restaurants, the Houston-based company that owns more than 40 restaurant chains and 400 properties including restaurants, hotels and casinos, has sued a former employee for breaching a non-compete agreement. Last week, Landry’s filed suit against Tim Kohler, who formerly served as director of operations for Vic & Anthony’s Steakhouse, the highly-acclaimed steakhouse with locations in Houston, Las Vegas, Atlantic City and New York. Landry’s fired Kohler in August for “performance related reasons.” Upon his termination, Kohler accepted a severance package conditioned upon reaffirming and extending his non-compete agreement. Kohler subsequently went to work for a company called Landmark Houston Hospitality Group, where he will be involved in operating the yet-to-be-opened Mr. Peeples Seafood & Steaks in Houston. The lawsuit names both Kohler and Landmark as defendants.

According to the complaint, Kohler signed a non-compete provision that barred him from working for a competitor within 30 miles of any Landry’s restaurant for eighteen months following the end of his employment. The severance agreement reaffirmed the non-compete and extended its duration. Additionally, Koehler also agreed not to solicit any Landry’s employers to work for a competitor for at least two years.

In a case like this, I normally would give the former employee an edge on the merits: First, the agreement is overly broad in geographic scope. Landry’s has restaurants everywhere. If Kohler could not work for any competitor (i.e. any other restaurant company) within 30 miles of a Landry’s restaurant, he probably could not work anywhere in the state of Texas. Remember, Landry’s owns restaurants like Morton’s, McCormick & Schmick’s, Rainforest Café, and Bubba Gump Shrimp, just to name a few. Under the terms of the non-compete agreement, Kohler would be barred from working in every major city in Texas. That’s a bit over the top.

In addition to being overly broad in geographic scope, the legitimate business interest also is a bit suspect. The complaint alleges that Kohler had access to confidential information, including things like Landry’s policies and procedures, pricing, and directories of employees, customers and vendors. But that’s mostly smoke and mirrors: First, vendors (e.g. companies that supply food, wine, etc.) are probably well-known within the industry and probably work with multiple restaurants. In many states, there is case law holding that vendor/supplier relationships cannot be protected with a non-compete agreement. Next, there are the customers. Restaurants typically do not have exclusive customer relationships of the type that can be protected with a non-compete agreement. With respect to knowing the identity of current Landry employees, that also is public knowledge and will not justify enforcement of a non-compete agreement. When you boil it down, Landry’s is alleging that Kohler, who they fired six months ago, might remember confidential information about its policies, procedures and pricing. That is not a particularly compelling argument.

Then there is the matter of the non-solicitation clause. In Texas (unlike in some other states), agreements not to solicit are evaluated according to the same framework as non-compete agreements (i.e. legitimate business interest test). See, e.g., Marsh USA Inc. v. Cook, 354 SW 3d 764 (Texas 2011). Often, non-compete cases focus on a former employee soliciting his old company’s clients. In that situation, the non-solicitation clause is being used to protect a legitimate business interest. But in the context of the restaurant industry, those types of customer relationships do not really exist. Instead, this case focuses on Kohler’s solicitation of Landry’s employees. Basically, the argument for enforcing this non-solicitation clause would be that Kohler (and Landmark) are soliciting Landry’s employees because they have valuable, confidential information or important contacts in the industry. I’m not sure I buy it. Again, there is a strong argument for why industry relationships (e.g. suppliers, vendors, etc.) should not be entitled to protection. So, once more, the issue of confidential information will be paramount.

That said, Landry’s has other factors that cut in its favor. Remember, Kohler allegedly accepted a severance package in exchange for reaffirming his non-compete commitments and extending the term of his non-compete agreement. Although this technically should not factor into the court’s evaluation of whether or not the agreement is supported by a legitimate business interest, I am fairly certain that it will. If Kohler accepted a severance package to stay out of the industry, pocketed the money, then turned around and went to work for a competitor, that is inequitable. The court won’t like that. And that will probably translate into the court giving Landry’s the benefit of the doubt on its somewhat vague allegations about its confidential information. It’s a sort of rough justice.

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on cases involving non-compete disputes, antitrust and business torts. He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando.

]]>https://thenoncompeteblog.com/2013/04/02/restaurant-industry-giant-landrys-sues-former-employee-rival-restaurant-company/feed/0thenoncompeteblogTexas Court of Appeals Strikes Down Cardiologist Non-Compete Agreement on Public Interest Groundshttps://thenoncompeteblog.com/2013/02/12/texas-court-of-appeals-strikes-down-cardiologist-non-compete-agreement-on-public-interest-grounds/
https://thenoncompeteblog.com/2013/02/12/texas-court-of-appeals-strikes-down-cardiologist-non-compete-agreement-on-public-interest-grounds/#commentsWed, 13 Feb 2013 04:33:42 +0000http://thenoncompeteblog.com/?p=291Continue reading →]]>Last week, the Texas Court of Appeals affirmed a trial court order finding a physician non-compete agreement unenforceable as against public policy. Although Texas has no outright ban on physician non-compete agreements (like Massachusetts or Alabama), the decision suggests that Texas courts may be willing to invalidate physician non-compete agreements where there is evidence of public harm. The lawsuit arose out of a relationship between two cardiologists in the East Texas city of Nacogdoches.

In 1984, Dr. Prabhakar Guniganti opened the Nacogdoches Heart Clinic (NHC). Dr. Vijay Pokala joined the practice five years later. Eventually, the two doctors opened an outpatient lab known as East Texas Cardiovascular Labs (ETC). Both doctors owned a stake in each practice. Guniganti owned 55% of NHC and 65% of ETC. Pokala held 45% and 35% stakes, respectively. Both Guniganti and Pokala were classified as employees of NHC. Both had employment agreements with NHC. Those employment agreements contained a non-compete provision. Each physician agreed that upon termination of employment at NHC, he would not practice medicine (or have any ownership or interest in a medical practice whatsoever) within ten miles of the Nacogdoches city limits for a period of one year. On February 2 2006, following a dispute over a patient, Guniganti fired Pokala from NHC. Days later, Pokala opened his own practice. Two weeks later, NHC and Guniganti filed suit alleging – among other causes of action – that Pokala had breached his non-compete agreement. Pokala countersued for breach of a buy-sell agreement and breach of his employment contract with NHC.

The trial court ruled, in relevant part, that the covenant not to compete contained in the NHC employment agreement was unenforceable. The trial court’s holding was grounded in concern for the public interest. Nacogdoches is a small town and the loss of even one experienced cardiologist could have adversely impacted the community. The record from trial was consistent with this holding. Testimony suggested that the demand for cardiologists in the town was so great that Pokala worked nearly eighteen hours a day and received several calls each night after leaving the office. In light of these considerations, the court refused to enforce the non-compete agreement.

Guniganti appealed. In what may stand as an opinion for the ages, the Texas Court of Appeals affirmed the trial court’s ruling, holding that the non-compete agreement was overbroad, contrary to the public interest and therefore unenforceable. First, the agreement prohibited Pokala from practicing medicine of any sort – not just cardiology – within ten miles of the city limit. The appellate court found that such a restriction was overbroad in scope and was greater than necessary to protect NHC’s legitimate interests. Second, and more significantly, the court held that the public interest in physician choice and access to medical care trumped the freedom of contract.

The court took pains to stress that “Texas law recognizes and protects a broad freedom of contract,” but that such freedom is not unlimited. Private contractual rights must always be balanced against the public interest. And in this case, the record established that enforcement of this specific agreement, in this specific community, would have resulted in public harm. Case in point: When Dr. Pokala opened his practice in 2006, there were only three cardiologists in Nacogdoches. A representative of the Nacogdoches Hospital District testified that if Dr. Pokala was forced out of the market, it would “destabilize[] the availability of cardiovascular care in Nacogdoches County, and certainly the coverage of the emergency room.” Beyond this, the record established that Dr. Pokala routinely served indigent patients and never turned away a patient simply because they lacked the means to pay. On these facts, the Court of Appeals affirmed the trial court ruling that the non-compete agreement was unenforceable.

In attempting to push back against this reasoning, NHC and Dr. Guniganti argued that Texas law prevented the court from considering the public interest writ large. NHC argued that the validity of the non-compete agreement could be determined only by reference to the two criteria named in Texas Business and Commerce Code Section 15.50, the Texas statute that regulates physician non-compete agreements. That statute lacks a specific public interest factor. The Court of Appeals emphatically rejected this argument, holding that Section 15.50 is merely a codification of the rule of reason, of which the public interest is one factor. Beyond this, the court held that public policy is always a valid consideration in determining the enforceability of a contract.

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on cases involving non-compete disputes, antitrust and business torts. He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando. If you have a non-compete question or need a referral to a non-compete lawyer in your area, please contact Jonathan’s Fort Lauderdale office at 954-332-2380.